Bond yields jump most this week since September

Yields stay near highest since May after payrolls report

DeborahLevine

SAN FRANCISCO (MarketWatch) — Treasury yields rose this week by the most since September as a confluence of fiscal, monetary and economic news worked against investors’ interest in U.S. debt.

During the week, Washington approved some tax increases to avoid completely going over the fiscal cliff, the Federal Reserve hinted at an end to its bond purchases and the Labor Department said Friday the U.S. economy added 155,000 jobs in December.

And after being on edge so long waiting for Washington to deal with expiring tax breaks and spending measures, “once the market decided we weren’t permanently going off a cliff, it took off like a rocket.”

Yields on 10-year notes
US:10_YEAR
which move inversely to prices, fell 1 basis point to 1.92%.

They’re up from 1.71% last Friday, the biggest weekly rise since last September — which followed the announcement of a new Fed bond-buying program.

The benchmark security’s yield is still the highest since May, though off from highs seen before the payroll report was released.

Yields on 30-year bonds
US:30_YEAR
turned down 3 basis points to 3.11%. Still, this week they’ve increased by the most in more than three months.

As for a first week of the year, 10-year yields rose the most since the week ended Jan. 2, 2009 -- as markets thought they were beginning to heal from the U.S. credit crisis.

For 30-year bond yields, this is the biggest weekly move of the year in at least 20 years, according to FactSet.

On Friday,bonds initially pared a decline after the headline payrolls figure came in weaker than economists expected.

In the same report, the Labor Department also raised its nonfarm-payrolls figure for November, and said the unemployment rate remained flat at 7.8%. While that last part was expected, it’s important as it’s being watched closely by the Federal Reserve and is key to policy makers’ decision about when to back off from the central bank’s massive bond-purchase plan. Read: U.S. economy adds 155,000 jobs in December.

Growth in December’s private payrolls — excluding government jobs — was fairly robust, which is a positive indicator for the economy, said Richard Gilhooly, rate strategist at TD Securities.

“The general view is that the recent numbers were likely depressed by fiscal-cliff issues, such that improvement should be seen in coming months,” he said.

On Thursday, one reason U.S. bonds sold off was that minutes from the latest Fed policy meeting indicated that large-scale bond purchases, known as quantitative easing, may stop this year, but Fed policy makers also said they want to see unemployment trending lower and are willing to let inflation rise to do it. Read: Treasury yields hit 7-month high after Fed minutes.

With that in mind, how did the bond market interpret the employment report?

“Bonds initially traded higher on the unemployment rate and the idea that QE is pegged to at least 6.5%, but the market has traded back to the lows subsequently on what is generally a firm report and likely better ahead,” Gilhooly said.

Congress’ ‘pathetic’ deal

Earlier in the week, just after the new year, Washington lawmakers passed tax increases for a small minority of Americans, but deferred dealing with spending cuts for a couple months. It was enough to send U.s. stocks sharply higher, but bond analysts remain worried about the probability of a fractious debate over spending cuts at the same time as lawmakers need to raise the debt ceiling so the government can pay its existing bills.

“The market was relieved they did something, but it was a pathetic temporary resolution,” Balestrino said. “We have a potential big fight in the making.”

“With 10-year yields still below 2%, below the rate of inflation, it argues there’s still a fear premium in there, some thinking that something can go awry,” he said.

Even if rates drift up another 25 basis points over the next couple months, which would be a sharp hit to bond returns, he doesn’t expect a move much higher than that until lawmakers come up with a sustainable, realistic solution to deal with the country’s fiscal shortfall.

For the week, big bond exchange-traded funds are also lower.

The iShares iBoxx $ InvesTop Investment Grade Bond Fund
LQD, -0.55%
is off 0.8% for the week. The Vanguard Total Bond Market ETF
BND, -0.38%
is off 0.5% this week.

Heavily-leveraged ETFs have seen more dramatic moves.

The iShares Barclays 20+ Year Treasury Bond Fund
TLT, -1.23%
has dropped 4.1% for the week, while the ProShares UltraShort Lehman 20+ Year Treasury ETF
TBT, +2.27%
has jumped 8.6% so far in 2013.

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